UBS report: Cryptocurrency is a speculative asset, not a currency, and regulation is only one of its many disadvantages

The report is from UBS and prepared by UBS, UBS Switzerland, UBS Hong Kong and UBS London. The original title-zce is "Crypto regulation is just one downside among many".

The following is the text:

Some important points in time:

The Chinese government has banned financial institutions from providing services related to crypto trading, the latest in a series of official moves to restrict market activity. Speculation in cryptocurrencies "seriously violates the safety of people's property and disrupts normal economic and financial order," the official statement added.

According to a report in The Economic Times, the Indian government is also considering setting up a group to study possible regulatory approaches.

UBS Wealth Management Issues $50 Million Blockchain Bonds to High Net Worth Individuals in Asia: UBS Wealth Management announced the issuance of $50 million blockchain-based debt securities to high net worth individuals (HNWIs), Jinse Finance reported. Investors in Hong Kong and Singapore bought a six-month fixed-rate security token through a private placement.

Amy Lo, Co-Head of Asia Pacific at UBS Global Wealth Management, said: “We have shown strong interest in initial offerings from regional high-net-worth individuals and family offices, underscoring their interest in digital securities. UBS's London office issued the securities in accordance with English and Swiss law. While UBS is the issuer, third-party issuers will be explored in the future. The project uses a permissioned version of Ethereum. [2022/12/19 21:54:13]

The news should challenge the prevailing view among crypto enthusiasts that crypto and other decentralized finance applications can operate completely free of government influence.

UBS Global Wealth Management: ECB tightening expected less than Fed EUR/USD set to fall this year: January 16 news The EUR/USD looks set to fall this year as the ECB is less likely to tighten policy than the Fed EUR/USD will hit an expected low of 1.10 in June this year, previously expected in December. A recent surge in U.S. inflation has increased the urgency for the Fed to tighten monetary policy, with the Fed likely to end asset purchases and raise interest rates in March, at the same time it is expected to start shrinking its balance sheet later this year. The European Central Bank appears to be "more relaxed" about the current high inflation, suggesting that it will not raise interest rates for at least the next 18 months. (Golden Ten) [2022/1/17 8:53:28]

We see a number of ways that governments can influence the cryptocurrency market, including through banking regulation and taxation. Holding cryptocurrencies is also increasingly subject to capital gains and other taxes in many other parts of the world.

Chairman of UBS Group: Cryptocurrency is a "highly speculative investment tool" and will not provide customers with cryptocurrency transactions: According to cointelegraph, UBS Chairman Axel Weber said in a speech in Basel, Switzerland that Switzerland's largest bank will not Offers Bitcoin and other cryptocurrency transactions to its clients. Weber called for tighter controls on cryptocurrencies, claiming that cryptocurrencies are often opaque and therefore open to misuse. He also said that cryptocurrencies are, at best, “very speculative investment vehicles.” At worst, it facilitates "terrorist financing, money laundering and other criminal activities." He believes that currently cryptocurrencies do not have the characteristics of money, are very unstable, and are rarely used to make proper payments. But Weber acknowledged that he sees opportunities in blockchain. Blockchain technology makes the process simpler, faster and more secure. Good for customers, shareholders or banks. [2018/5/5]

But we believe investors should view cryptocurrencies like Bitcoin as speculative assets, in part for the following reasons, aside from regulatory challenges:

Ex-UBS banker launches digital currency fund to raise $10M: Ex-UBS banker Jan Brzek has launched a new digital currency fund and plans to raise it by the end of the month, according to Bloomberg $10 million in funding. Buzek said that the digital currency fund is currently registered overseas and is essentially a passive fund (but he plans to launch an active-zce fund product this summer), tracking the first blue chip index of digital currency. However, Buzek admitted for the first time that the volatility of digital currencies is "very high" compared to traditional asset classes. Unlike many asset managers, though, he sees opportunity in digital currencies rather than pure risk. He feels that other investment classes “have hardly any room for improvement.” [2018/1/25]

1. Cryptocurrencies are not money.

The basic function of modern money is to store value and serve as a medium of exchange. The high volatility of cryptocurrencies makes them unreliable stores of value, and it is common for Bitcoin to fluctuate by more than 10% on a weekly basis. In the week ending May 14, Bitcoin fell 24%, which is high volatility for a small-cap stock, let alone a currency. The lack of mass adoption also limits the long-term potential of cryptocurrencies as a store of value, with over 4,000 cryptocurrencies currently listed on CoinMarketCap.com, yet only a handful of companies accept them as a form of payment. Recently, Tesla also suspended crypto payments.

2. We believe that portfolio holdings of cryptocurrencies have limited returns.

Given the low correlation with conventional assets, the best portfolio situation for cryptocurrencies is as a diversifier. However, we believe that with increased correlations with risky assets, diversification alone is not enough to add cryptocurrencies to a portfolio. Investors also need to look at risk-adjusted returns to determine whether they are adequately compensated for the risk they are taking. We don't know of any significant use cases in reality yet, although we don't rule out the possibility of a price increase.

3. As the largest cryptocurrency, Bitcoin has an adverse impact on the environment.

Given the computing power required for Bitcoin, crypto mining and operations not only fail to improve living standards, but also amplify carbon emissions. Bitcoin consumes as much energy as the entirety of Switzerland, and its environmental impact is increasing, according to an online calculation tool from the University of Cambridge. Its use in money laundering and tax evasion also raises further red flags for ESG investors. Nor can we believe that a growing number of sustainability-oriented investors can reconcile these issues.

In summary, we advise clients to be cautious about crypto speculation. Investors looking for exposure to digital payments assets may consider fintech, one of the emerging sectors that we believe may represent the "next big thing" for investors.

1. The dollar weakens further. The dollar continued to slide on Tuesday, reaching its lowest point since December 2020, as investors grew increasingly confident that the Federal Reserve would examine recent inflation concerns and maintain its accommodative policy stance. The U.S. dollar index (DXY) is currently around 89.85. Meanwhile, the euro climbed back above $1.22 for the first time since January. Markets briefly revived talk of an early taper after U.S. inflation rose above expectations last week, but Fed officials quickly dismissed such speculation. Trading markets will continue to pay close attention to upcoming data releases, especially those related to the reopening of the economy. As the recovery unfolds, we believe cyclical currencies should benefit, with less demand for safe havens such as the US dollar.

2. Despite the uneven data in April, China's economy is still expected to enter the recovery track.

The latest economic data from China this week was mixed. Retail sales growth fell sharply from a high base last year, while industrial output slowed amid global supply chain bottlenecks and rising raw material costs. Fixed-asset investment also slowed as regulators scrutinized property developers' financing activities. But after accounting for fundamental effects, the two-year average CAGR suggests that the recovery remains stable. We remain optimistic on China as we expect consumption and investment growth in 2H to offset slowdown in exports and industrial production, and expect GDP growth to exceed 8% in FY21. We maintain our positive view on MSCI China equities, supported by a broader economic recovery, stable liquidity and very low risk of a policy turnaround. Investors looking for near-term opportunities in the Chinese market should consider the beneficiaries of economic reopening and inflation, including banks, renewable energy, metals and mining, consumer durables and services, and power equipment.

Translation: Mary Liu

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